Plaintiff John Lahoud entered into a contract with Anthony & Sylvan Corp., t/a Anthony Sylvan Pools (“A&S”) to install a pool at his home. The contract contained an Alternate Dispute Resolution (“ADR”) provision which required that the parties submit to arbitration any claim arising from the contract, except the contractor reserved the right to file in a civil court to collect monies it claimed were due under the contract. A dispute arose during the excavation of the pool, upon which the plaintiff declared that the contractor was in material breach of the contract and informed the contractor that he was terminating the contract. The issue in the published decision of Lahoud v. Anthony & Sylvan Corp., t/a Anthony Sylvan Pools, 2025 N.J. Super. LEXIS 11 (App. Div. Feb. 6, 2025) was whether the arbitration provision was unenforceable because it contained a reservation of rights as to the contractor only to sue in court to collect monies it claimed may be due under the agreement.
The plaintiff filed a lawsuit against the contractor A&S, claiming a breach of contract, a violation of the New Jersey Consumer Fraud Act, and for declaratory relief declaring that the arbitration provision violated the public policy of the State and was not enforceable. In lieu of filing an Answer, A&S filed a motion to dismiss the plaintiff’s complaint based on the ADR clause. Plaintiff cross-moved for a declaratory judgment, contending that the arbitration clause violated public policy and that the court should find it unenforceable.
The trial court granted A&S’s motion to compel arbitration and ordered the parties to abide by the contractually agreed dispute resolution mechanism and dismissed the complaint without prejudice. The court concluded that the ADR provision did satisfy New Jersey case law and was enforceable. The court found that the reservation of rights provision that permitted the defendant contractor to bring legal action in the courts of New Jersey for the collection of money, but prohibited plaintiff from doing so, did not violate New Jersey law.
The plaintiff appealed this ruling to the Appellate Division. He made two arguments, as follows: “1) The ADR language does not advance the public policy supporting enforceability of arbitration provisions; and 2) the motion court erred in upholding the one-sided ADR provision.”
The Appellate Division agreed with the trial court that the ADR provision met the standard under New Jersey law to be enforceable. The Court noted that it “clearly and unambiguously evidences a waiver of plaintiff’s right to pursue any claims against A&S in a judicial forum and obligates plaintiff to resolve his claims for remediation in arbitration.” It found that this contract was not a contract of adhesion. It was not presented to plaintiff on a take it or leave it basis. Plaintiff selected A&S to install his pool and had the express right under the contract to retain counsel to review and negotiate contract terms, as well as a three day right of rescission. Thus, the Appellate Division rejected plaintiff’s contention that the ADR provision made the contract unconscionable.
However, the Appellate Division did have an issue with the reservation of rights provision. Based upon the wording of this provision, although A&S could pursue a claim in court for money damages, plaintiff would be precluded from asserting a counterclaim or defense if A&S did exercise its reservation of rights. The contract was very clear that all of plaintiff’s claims must be brought in arbitration, if mediation was unsuccessful, and not in court.
The Court found that this “grossly unbalanced approach” to the availability of a court of law to the contractor only constituted a harsh and unfair one-sided term that lacked mutuality and, therefore, was not enforceable. Hence, the Appellate Division found that A&S was not entitled to summary judgment as a matter of law on the issue of unconscionability with regard to the reservation of rights provision.
However, the Appellate Division continued in its review of the contract and noted that it contained a severability clause which stated that “if a judge or arbitrator finds any provision of this agreement invalid or illegal under applicable law or regulation, the remaining provisions will still be valid and remain in effect.” The Court further pointed out that this severability clause is only mentioned in the ADR provision in the contract and not elsewhere.
The Appellate Division noted that courts can sever an invalid provision of a contract “unless striking the illegal provision defeats the primary purpose of the contract.” The purpose of the severability clause would be indicative of the parties’ intent that the agreement as a whole should survive the excision of an unenforceable provision.
The Court found that the one-sided nature of the reservation of rights provision could be cured by striking it from the contract based upon the severability clause. That would leave the remaining portions of the contract enforceable, including the ADR provision.
In summary, the Appellate Division found: 1) the ADR provision clearly waived plaintiff’s right to bring a civil lawsuit; 2) the reservation of rights provision was unconscionable and unenforceable; and 3) the reservation of rights provision would be severed from the contract. The Court also ruled that the trial court made a mistake in failing to stay plaintiff’s complaint pending the arbitration. Thus, it remanded the matter back to the trial court to enter a new order reinstating plaintiff’s complaint and staying the complaint pending the resolution of any mediation and arbitration proceedings.
